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The FHA: An Overview Chapter 1

Today's FHA and VA 8/15/2015 Chapter 1: The FHA: An Overview Introduction The Federal Housing Administration and its mortgage insurance program was developed to provide assistance to encourage homeownership for a predominantly “renter- oriented” time in 1930s U.S. history. The FHA is still operating today, helping to provide insurance on loans for approved lenders. 3

Today's FHA and VA 8/15/2015 Chapter 1: The FHA: An Overview Key Terms FHA (Federal Housing Administration) A government agency that provides mortgage insurance on loans made by FHA- approved lenders throughout the United States and its territories. It insures mortgages on single- and multi-family homes, including manufactured homes. HUD (Department of Housing and Urban Development) A federal agency responsible for encouraging housing development and managing the Federal Housing Administration. 4

Chapter 1: The FHA: An Overview Key Terms Manufactured Home Any dwelling unit built on a permanent chassis and attached to a permanent foundation system. Mortgage An instrument that pledges and creates a voluntary lien on real property to secure repayment of a debt. The parties to a mortgage are the mortgagor (borrower) and mortgagee (lender). Today's FHA and VA 8/15/2015 5

Chapter 1: The FHA: An Overview The Federal Housing Administration (FHA) The FHA is a government agency. It provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. The FHA insures mortgages on single- and multi-family homes, including manufactured homes. Today's FHA and VA 8/15/2015 6

FHA Mortgage Insurance Provides lenders with protection against losses in the event that homeowners default on their mortgage loans. The FHA pays a claim to the lender if a default occurs. Loans must meet certain requirements established by the FHA to qualify for this insurance. 8/15/2015 Chapter 1: The FHA: An Overview 7

Advantages of FHA Loans Easier to Qualify –Because mortgages are insured, lenders may be more willing to give buyers loan terms that make it easier for them to qualify than for conventional loans. –Buyers do not need a perfect credit score to get an FHA mortgage. Low Down Payment –FHA loans for a real estate purchase transaction have a 3.5% down payment requirement (depending on the applicant’s credit rating). –Down payments may come from a family member, employer, or charitable organization as a gift. Lower Interest Rates –FHA loans have competitive interest rates. –Rates are set by the market as with any other type of loan. Help Keeping a Home –The FHA can help buyers after the sale with many options to help homeowners stay in the home and avoid foreclosure. 8/15/2015 Chapter 1: The FHA: An Overview 8

FHA Funding The FHA is the only government agency that operates entirely from its self-generated income, with no costs to the taxpayers. Proceeds from mortgage insurance paid by homeowners are captured in an account used entirely to operate the program. The FHA provides significant economic stimulation in the form of: –Home and community development –Building suppliers –Tax bases –Schools –Additional forms of revenue 8/15/2015 Chapter 1: The FHA: An Overview 9

Through the Decades: A History of FHA 1934 –The FHA was created. America was primarily a nation of renters and terms were difficult to meet for homebuyers seeking mortgages. 1940s –FHA programs financed military housing for veterans. 1950s, 1960s, and 1970s –The FHA became part of the Department of Housing and Urban Development’s (HUD) Office of Housing. 1980s –The FHA steadied falling home prices during the recession –Homeownership rate raised an all-time high of 68% in –The FHA created policy changes to manage risk for the housing market recovery. 8/15/2015 Chapter 1: The FHA: An Overview 10

Eligibility Requirements for FHA Financing HUD does not loan money directly to homebuyers. The FHA insures mortgages made by approved lenders to individuals, non-profit, and government agencies approved to participate in HUD’s programs. To be eligible for FHA financing, one must –Have a valid social security number –Have valid residency in the United States –Be of legal age to sign a mortgage in his state FHA mortgage programs do not typically give maximum income limits for qualifying, but the borrower must have sufficient income to qualify for the mortgage payment and other debts. Lenders will verify a borrower’s income, assets, liabilities, and credit history. 8/15/2015 Chapter 1: The FHA: An Overview 11

FHA for Veterans The FHA program continues to supplement the VA Homeownership Loan Guaranty programs for veterans: –With less-than-full eligibility for a VA-guaranteed loan. –Who are co-borrowers with someone other than a spouse. –Whose eligibility is tied up until a loan that was assumed is paid off or the veteran is released from all liability. –Who are re-using their eligibility and whose new loan under VA may have a funding fee greater than the FHA’s mortgage insurance premium. 8/15/2015 Chapter 1: The FHA: An Overview 12

Chapter 1: The FHA: An Overview FHA Maximum Mortgage Limits The National Housing Act provides formulas for HUD to govern maximum mortgage limits for loans insured by the FHA. These limits are determined by the county in which the property is located and can vary broadly. No FHA mortgage can be originated that is in excess of county limits. Generally, for single-family housing, the maximum mortgage limits are: –$250,000 to $500,000 –More than $700,000 for certain “high-cost” areas. Today's FHA and VA 8/15/

Chapter 1: The FHA: An Overview Summary 1.The Federal Housing Administration, generally known as the “FHA,” is a government agency that provides mortgage insurance on loans made by FHA-approved lenders. 2.The FHA insures mortgages on single- and multi-family homes, including manufactured homes. 3.Less strict credit qualifying criteria for borrowers and lower down payments are advantages of FHA loans. 4.The FHA is the only government agency that operates entirely from its self-generated income, with no costs to the taxpayers. 5.FHA mortgage programs do not have maximum income limits for qualifying, but a borrower must have sufficient income to qualify for the mortgage payment and other debts. Today's FHA and VA 8/15/

Discussion Point What issues regarding FHA lending have been raised throughout this chapter? Which ones place great responsibility on the appraiser? 8/15/2015 Chapter 1: The FHA: An Overview 15

Chapter 1 Quiz 1. FHA mortgage insurance provides a.an emergency account available for the homeowner to prevent loan default. b.homeowners with a claim in the event that a default occurs. c.protection against losses for homeowners in the event that there is a default on their mortgage loans. d.protection against losses for lenders in the event that homeowners default on their loans. Chapter 1: The FHA: An Overview Today's FHA and VA 8/15/

Chapter 1 Quiz 2. FHA loans a.allow the down payment requirement to come from a family member, employer, or charitable organization as a gift. b.are more difficult to qualify for than a conventional loan if the buyer does not have a high credit score. c.have a 5% down payment requirement (depending on the applicant’s credit rating) for a real estate purchase transaction. d.require a larger cash investment to close compared to conventional loans, but has more flexibility in calculating household income and payment ratios to qualify for the loan. Chapter 1: The FHA: An Overview Today's FHA and VA 8/15/

Chapter 1 Quiz 3. The FHA provides significant economic stimulation in the form of: a.Home and community development b.Schools c.Tax bases d.All of the above Chapter 1: The FHA: An Overview Today's FHA and VA 8/15/

Chapter 1 Quiz 4. To be eligible for FHA financing, one must: a.be at least 16 years old. b.have a perfect credit history. c.have a valid residency in the United States. d.have an income of more than four times the monthly mortgage payment. Chapter 1: The FHA: An Overview Today's FHA and VA 8/15/

Chapter 1 Quiz 5. The FHA program supplements the VA Homeownership Loan Guaranty programs for veterans a.who are co-borrowers with a spouse. b.who have successfully paid off or have been released from all liability of repaying a separate loan. c.who have full eligibility for a VA-guaranteed loan. d.whose new loan under VA may have a funding fee greater than FHA’s mortgage insurance premium. Chapter 1: The FHA: An Overview Today's FHA and VA 8/15/

Chapter 1 Quiz 6. Generally, for single-family housing, the maximum mortgage limits are __________ for most areas and more than __________ for certain “high-cost” areas. a.100,000 to 300,000; 500,000 b.200,000 to 500,000; 600,000 c.250,000 to 500,000; 700,000 d.300,000 to 600,000; 800,000 Chapter 1: The FHA: An Overview Today's FHA and VA 8/15/